Exchanges take issue with CFTC's contract volume requirement

The Commodity Futures Trading Commission (CFTC) has called for exchanges to de-list contracts that fail to maintain at least 85% of the market's average trading volume. The proposal is one among many included in “Core Principles and Other Requirements for Designated Contract Markets,” which was published in the Federal Register and closed for comments yesterday.

The massive proposal, which can be downloaded via the link above, was written to comply with the Dodd-Frank Act. The financial reform legislation, passed in 2010, includes a new statutory framework that, among other things, amends the portion of the Commodity Exchange Act that applies to the designation and operation of futures exchanges.

Although exchanges submitted public comments on numerous parts of the sweeping regulatory package, one area that received a great deal of attention was Core Principle 9. Specifically rule 38.502(a), it would require that 85% or greater of the total volume of any contract listed on an exchange be traded on that exchange's centralized market. That means the exchange would not be able to list a contract that didn't achieve that 85% average. (Existing contracts would be grandfathered.)

CME Group is one exchange that took issue with the proposal for Core Principle 9.

“The 85% centralized market trading requirement is completely arbitrary,” wrote CME Group CEO Craig Donohue in his comments. “The Commission justifies the requirement only with its observations as to percentages of various contracts traded on various exchanges -- it provides no support for a position that the 85% Requirement provides or is necessary to provide a -- competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized market of the board of trade.

“The Commission does not assert in its proposal that the 85% Requirement has any regulatory benefit for either it or market participants,” he continued. “Indeed, there is no such benefit.”

IntercontinentalExchange Inc. Senior Vice President and General Counsel Audrey Hirschfeld warned in her comments: “The minimum trading threshold set by the Commission would allow only the most liquid contracts to remain as futures. Many current DCM listed contracts would not meet this criterion, including some agricultural contracts. ICE proposes that the Commission take a more flexible approach to the minimum centralized market trading requirement. At the very least, ICE suggests that the Commission lower the threshold for futures to no more than 75% which would allow many less liquid contracts to remain a future.”

Janet McGinness, corporate secretary of NYSE Liffe US, suggested that the CFTC's proposal ignores reality.

“[I]t is the Exchange’s contention that a one-size-fits-all approach to the protection of price discovery is unworkable and ignores the reality that the price discovery function of a market is but one of many factors that bear consideration, all of which should be appropriately balanced against each other on a market-by-market basis to ensure a beneficial and healthy market,” she wrote. “Only in cases where a particular market is deemed to serve a primary price discovery function should such market be subject to a more stringent standard under Core Principle 9, but such standard should be based on a sliding scale that considers its relative dominance as measured by several factors, including trading volume and open interest.”

To read all the public comments on “Core Principles and Other Requirements for Designated Contract Markets,” click here.

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